Sit at any dinner table, bar, kids sports game, in fact practically any social event and conversation soon turns to what with happen with Sydney property prices in 2017.

Sydney property prices are notoriously hard to predict but are critical to get your head around if you are an investor, home owner or casual observer because they usually lead the nation. What Sydney property prices do is usually followed by the rest of the country.

Sydney property prices have grown about 67% in the last 4 years and Melbourne has not been too far behind with 46% growth in the same period.

The doomsayers

Certain international “celebrity” speakers have been coming to Australia for about 15years now predicting (Australian) Sydney property prices will crash up to 80% just because they have done so in the U.S. ignoring our entirely different banking system, underlying demand, historical evidence to the contrary and our deep conservatism.

Some more credible people do share the property bubble view however the probability of this happening is very small – I’d say less than 20%.

Mortgages in Australia are full recourse – linked to the person who took them out. Australian’s have very low default rates compared to the rest of the world and specifically against America.

Banks have fiduciary duties in Australia they do not have in other countries to ensure the person taking out the loan can afford it and this can be used as a defence if people default, Australian banks themselves don’t tend to be very strict with defaulters – Westpac tried that in the 80’s and people hated them so much they suffered profit wise for decades and lagged in home loan business compared to their competitors.

There are multiple layers of protection for Australians in mortgage trouble and in the past the government has stepped in to help when there is risk of large scale default. I could go on but I hope you get the picture.

Economic drivers

Before we get to that let’s focus on what economic issues are likely to impact on Sydney Property Prices this year.

Mr Trump

Nobody was more dumbfounded than me when Trump was elected President. Apart from my personal opinion that he’s mad I also think his policies, at best can’t be implemented and at worst will have significant negative economic impacts for the US and therefore the rest of the world.

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Many experts agree with me. Many do not. And nobody really knows how it’s going to turn out. But regardless Australia is not isolated from that.

Batten down the hatches.

Demand from Chinese investors remains strong

No other city has seen such demand as Sydney.

Some suburbs, such as Chatswood have seen extraordinary price growth on the back of Chinese demand.

The only non-Sydney suburb that has seen anything like that impact might be Glen Waverly in Vic.

And apart from natural demand there is more and more interest from Chinese Property Developers selling direct into the Chinese market.

So expect to continue to see lots of friendly Chinese hands up at auctions around Sydney for some time to come.

Banks will continue to defy the RBA

There was a time when the banks slavishly followed the RBA cash rate up and down in their mortgage pricing.

But as more lenders seek their funds from sources apart from money markets the cash rate has less influence over pricing. Especially since monetary policy now has limited impact on the economy.

And the banks have such a dominance in the Australian market they raise interest rates just because they can.

And the banks are concerned by property prices and have started tightening lending criteria for investors.

If they continue to increase interest rates independently of the cash rate it might be a good time to consider fixing your loan rates.

Regardless this restriction of lending supply will most likely cool the market.

What forecasters are saying

SQM managing director Louis Christopher says “Sydney prices may leap by as much as 18 per cent, followed closely by Melbourne at 17 per cent. If the cash rate remained unchanged in 2017, prices would still rise between 6 to 10 per cent.”

That’s a bold prediction but based on a solid premise of economic strength. “Affluent areas tend to be driven by the prosperity of local economy. And right now, both Sydney and Melbourne have the fastest-growing economies in the nation.”

BIS Shrapnel are taking a more conservative approach but are still predicting Sydney property prices to rise up to 3% in 2017 with the biggest risk being oversupply of apartments, especially in the inner-city areas.

This is a potential problem in Sydney with up to 60,000 apartments expected to come onto the market in the next few years but so far demand has soaked up supply. Biggest risk areas are Parramatta, inner west Sydney and Bankstown. However, there is far greater risk in Melbourne and Brisbane where demand is slowing but supply is continuing.

Ben Kingsley, Chairman of Property Investment Professionals of Australia is concerned about rising interest rates and negative gearing being a political target but he also says, “There are still plenty of opportunities to be found for investors … the long-term fundamentals of well-selected property remain strong.”

It’s important to understand that property growth is not linear. In other words, it doesn’t go up year after year at a steady rate. Usually what happens is it bursts up for a few years, goes flat or drops a bit for a few more and then bursts up again. Even if you buy just before any dip, as long as you can afford to, just hold on. If it’s quality property it will only be a few years before the price is back up to what you paid and then the rest is pure profit to you.

Generally, at the end of a boom in Sydney property prices fall a little then just taper off. So instead of double digit growth figures year after year it moves to single digit, then has a drop and then goes flat.

This chart shows that trend clearly. But as a long term investor the most important thing to take from this chart is that property prices have generally trended upwards since 1930, and that’s a very good thing!

So, what do you do?

Simply pause and evaluate your strategy a little.

There’s no reason not to keep investing. Just take a little more caution.

You might like to allow a little more leeway in your strategy, a bigger buffer, through not borrowing as much, being careful with capital, getting tenants on longer term leases and locking in interest rates.

Be especially cautious with new apartments in large developments. These are the highest risk at the moment.